Executive summary
This week we look at three critical issues:
- ECB on hold again. At its next meeting on 7 March, we expect the ECB to keep the deposit rate unchanged at 4.0% for the fourth time in a row. As the pace of disinflation slows down and wage growth has reaccelerated, we maintain our forecast of only 50bps of cuts in the second half of 2024. Meanwhile, significant central bank losses add another strain on fiscal balances, serving as an additional incentive for the ECB to adhere to quantitative tightening (QT) despite forthcoming policy easing.
- No quick fix for the German property sector. While house prices have fallen sharply over the last two years, we expect a stabilization of the property sector in 2024. The construction sector is taking the hit from constrained demand and elevated construction costs (+23.3% from Q1 2021 to Q3 2023). Between January and November 2023, 2,800 construction companies filed for bankruptcy (+14.8% y/y). Beyond the real economy, our analysis also looks at the housing-banking doom loop which appears under control for now. However, social consequences need to be monitored closely. The government has proposed a comprehensive package to revitalize the sector, which contributes 6% of German GDP, but it could be too little, too late.
- A catch-22 for Argentina. The sharp devaluation of the peso and strong fiscal consolidation should weigh on Argentines’ real income, pushing them down by nearly -10% in 2024, and strongly hitting consumption. We expect negative GDP growth of -2.5% in 2024, only offset by good agricultural output. Our expectations are for economic growth to recover to around +2% in 2025, driven by a strong J-curve effect on exports and a general improvement in the country's economic sentiment due to reforms that are (for now) welcome by the population in spite of the strong belt-tightening. But this is the catch: President Javier Milei’s pivotal Omnibus Law was rejected by Congress, meaning that major reforms could be watered down.